Netflix 4Q23 Earnings, Netflix Buys Rights for WWE Raw, Spatial F1 Racing on Apple Vision Pro

Some weeks, the news flow comes together in such a way as to result in a fun conversation at the end of the week covering several related topics. We will do that in today’s update. The update will begin with Netflix earnings, turn to Netflix getting into live sports/entertainment, and then conclude with a closer look at an intriguing concept for live sports consumption on Vision Pro.

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Netflix Earnings, Netflix Won't Want to Be Compared to YouTube

Hello everyone. The CY2Q23 earnings season covering April to June has officially begun. We kick things off in streaming land with Netflix. The update begins with Neil’s thoughts on Netflix’s earnings. The discussion then turns to why Neil doesn’t think Netflix will want to be compared to YouTube.

Netflix Earnings

Three months ago, the major takeaway from Netflix earnings was subscriber gains had returned at the potential risk of less attractive user economics (i.e. lower profitability per user). That major theme remained intact with Netflix’s 2Q23 earnings release.

As shown below, Netflix’s subscriber growth appears to be firmly back on track.

Netflix is back up to 18M new subs on a TTM basis. Although that’s roughly half of where growth was during the pandemic, it is up materially from the 2022 lows. This will likely alleviate concerns held by those who were disappointed at Netflix seemingly hitting a paid subscriber ceiling of 220M to 230M accounts.

Price cuts outside the U.S., the launch of an ad-supported tier in a number of countries, and to a lesser extent, the password sharing crackdown, are leading to renewed paid subscriber growth.

On the surface, strong subscriber growth is great news for Netflix. However, there are a few elements to the growth that caught my attention.

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Netflix Earnings, The Allure of Advertising in Video Streaming, HBO Max's Rebranding (Daily Update)

Hello everyone. We have a media / video streaming Tuesday on tap for today’s update. We will begin with Netflix earnings. The Netflix narrative is quickly shifting to advertising. That will lead to a few other streaming-related news items.

Netflix Earnings

Last week, Netflix reported 1Q23 earnings.

The good news for Netflix is that 1Q23 marks the third consecutive quarter of subscriber gains. Price cuts outside the U.S. and the launch of an ad-supported tier in a number of countries are offsetting higher churn from a still limited crackdown in password sharing. Netflix will start the password sharing crackdown in the U.S. soon.

The following exhibit looks at overall subscriber growth trends.

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Netflix Earnings, Reed Hastings Steps Down as co-CEO, Netflix Partners With Nike Training Club (Daily Update)

Hello everyone. One item on the agenda this week is to look ahead at Apple’s 2023 in terms of opportunities and challenges. For today’s update, we will examine Netflix’s earnings published last week. 4Q22 earnings season has arrived. The discussion will include Neil’s thoughts on Reed Hastings stepping down as Netflix co-CEO. Let’s jump right in.

Netflix Earnings

Last Thursday, Netflix reported CY4Q22 results. Paid subscriber results (+7.7M) beat management’s guidance of +4.5M.

Looking through the granular results by operating segments, there were no major changes on the subscriber front. As shown below in the following exhibit which tracks Netflix paid net streaming subscriber additions on a TTM, the trend continues to be down except for a slight bump higher in Latin America. Given Netflix's very weak first half of 2022, management's guidance commentary for modest subscriber growth in 1Q23 would lead to stabilization in new user growth on a TTM basis.

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Netflix 3Q22 Earnings, Netflix Wants a New Narrative, Netflix's ARPU Mission (Daily Update)

Hello everyone.

We are going to talk more about the iPad line tomorrow. There are a growing number of questions as to what Apple announced (and didn’t announce) yesterday regarding the iPad. We will go over where I think Apple may take the iPad line from here.

Today’s update will be dedicated to Netflix earnings. As the company with the most paid subs in video land, at least until Disney provides its updated subscriber total, Netflix results can provide insights as to how the paid video industry is evolving.

Let’s jump right in.

Netflix 3Q22 Earnings

Netflix successfully played Wall Street's expectations game. The 3Q22 paid subscriber guidance that management gave three months ago was very weak. Management was essentially calling for no subscriber growth on a global basis (+1.0M) despite having a strong quarter from a video content perspective.

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The Above Avalon Daily Update Recap (January 2021)

Along with publishing periodic articles that are accessible to everyone, I publish daily updates all about Apple. These updates are 2,000-word emails that revolve around Apple business and strategy analysis, my perspective and observations on current news and Apple competitors, and comprehensive coverage of Apple earnings, product events, and keynotes. These daily updates have become widely read and influential in the tech sector and Apple universe. The updates are now also available in podcast form called Above Avalon Daily.

Since 90% to 95% of my time is dedicated to researching and writing the daily updates and recording the corresponding daily podcast, I am introducing a new Above Avalon product called The Above Avalon Daily Update Recap to make it easy for everyone to keep abreast of where my focus has been. Each curated recap of the prior month’s updates includes access to one story from a daily update that I particularly enjoyed writing in the previous month.

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The following story was featured in the Above Avalon Daily Update published on January 14th, 2021 (prior to Apple reporting 1Q21 earnings).

Projections for Apple’s Buyback Pace

Apple has $79B of net cash on the balance sheet. By funding share repurchases and cash dividends, Apple has been gradually chipping away at that total (was $153B in FY17).

Based on my projections, Apple will be able to sustain the current pace of share buyback (approximately $70B per year) for an additional 11 to 13 quarters before net cash gets close to zero.

Where does my 11 to 13 quarters estimate come from?

There is a $25B delta between the amount of cash Apple is returning to shareholders each year ($90B) and annual free cash flow ($65B) - the amount of cash generation leftover after management has paid all of the bills and maintained / funded capital investments. Free cash flow is used to manage debt in addition to fund cash dividends and share repurchases. Meanwhile, Apple has $79B of net cash on the balance sheet. ($79B / $25B = 3.2 years or 13 quarters).

It is important to note that these are rough calculations. Apple’s cash needs will fluctuate year to year. This will have an impact on Apple's free cash flow. In addition, it would not be essential to know the exact moment net cash neutral is obtained, if Apple ever technically gets to that level, but rather when net cash is in the vicinity of $0.

Once Apple reaches a net cash neutral position, my estimate is Apple’s buyback pace will slow to something closer to $50B per year. This total is primarily derived from my Apple free cash flow projection ($70B per year) minus cash dividend expense ($15B per year). Over time, Apple's buyback pace can certainly increase to remain in line with free cash flow growth. The reverse is true as well - a slowdown in free cash flow may result in less buyback.

These estimates assume that Apple management continues to view share buyback as attractive at the current share price. That decision will ultimately be based on management's estimate of Apple's intrinsic value. Based on Apple's most recent buyback activity, management thinks Apple's intrinsic value is higher than $115 per share.

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Earnings / Financials

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Apple Peers and Competitors

Industry Analysis

Thursday Q&A (The following questions were submitted by Above Avalon members.)

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